Looking for investing ideas? Here’s your weekly digest of the Globe’s latest insights and analysis from the pros, stock tips, portfolio strategies plus what investors need to know for the week ahead.
Why investors need to be concerned about misleading risk ratings
The Canadian investment fund industry is undergoing a mass revision of its risk ratings, making many mutual funds and ETFs appear safer than they actually are, according to some investor advocates.
Every Canadian fund is required to rate its risk on a five-point scale from low to high based on its performance during the past 10 years.
But now that the 2008-09 financial crisis is no longer part of that track record, hundreds of funds are being reclassified to lower risk ratings. This includes what are widely considered to be higher-risk investments, such as all-equity funds, emerging markets and commodities.
“This will mislead investors. Advisers themselves are being fooled by the ratings,” said Ken Kivenko, a prominent investor-rights advocate. The “flawed” risk-rating framework is drawing Canadian investors, including retirees, into inappropriately risky funds, he said.
“It’s a risk people shouldn’t have to take in this day and age, that they might be buying a fund with a built-in time bomb.”
This one chart has been perfect for market timers
One specific index would have allowed investors to near-perfectly time equity markets over the past 14 months and it points to one indicator – U.S. corporate bond spreads – as the most important to follow in the weeks ahead, Scott Barlow writes.
Central bank monetary policy has been a central driver of equity market performance since mid-2018. The monetary tightening by the U.S. Federal Reserve and Bank of Canada in 2018 led to extremely weak equity markets in the second half of last year. The trend was reversed on Christmas Eve with the Fed’s pivot to a more accommodative, stock-friendly policy, and equities have been rallying since.
The importance of financial conditions – the ease of credit conditions and monetary policy – is apparent in the accompanying chart. The S&P 500 (and the S&P/TSX Composite Index to a significant degree, although it’s not shown) has closely tracked the Goldman Sachs U.S. Financial Conditions Index. The Goldman index is plotted inversely to better show the trend, so a rising purple-colour line indicates lower rates and easier credit conditions.
Bond spreads and equities:
Gauging what’s next
S&P 500
Goldman Sachs U.S. Financial
Conditions Index (inverted)
3,150
98.5
3,050
99.0
2,950
2,850
99.5
2,750
2,650
100.0
2,550
2,450
100.5
2,350
2,250
101.0
J
A
S
O
N
D
J
F
M
A
M
J
J
2018
2019
Merrill Lynch U.S. Corporate BBB
Option-Adjusted Spread (inverted, %)
S&P 500
3,150
1.25
3,050
1.35
2,950
1.45
2,850
1.55
2,750
1.65
2,650
1.75
2,550
1.85
2,450
1.95
2,350
2.05
2,250
2.15
J
A
S
O
N
D
J
F
M
A
M
J
J
2018
2019
JOHN SOPINSKI/THE GLOBE AND MAIL, SOURCE:
SCOTT BARLOW; BLOOMBERG; Federal Reserve
Economic Data
Bond spreads and equities:
Gauging what’s next
S&P 500
Goldman Sachs U.S. Financial
Conditions Index (inverted)
3,150
98.5
3,050
99.0
2,950
2,850
99.5
2,750
2,650
100.0
2,550
2,450
100.5
2,350
2,250
101.0
J
A
S
O
N
D
J
F
M
A
M
J
J
2018
2019
Merrill Lynch U.S. Corporate BBB
Option-Adjusted Spread (inverted, %)
S&P 500
3,150
1.25
3,050
1.35
2,950
1.45
2,850
1.55
2,750
1.65
2,650
1.75
2,550
1.85
2,450
1.95
2,350
2.05
2,250
2.15
J
A
S
O
N
D
J
F
M
A
M
J
J
2018
2019
JOHN SOPINSKI/THE GLOBE AND MAIL, SOURCE:
SCOTT BARLOW; BLOOMBERG; Federal Reserve
Economic Data
Bond spreads and equities: Gauging what’s next
S&P 500
Goldman Sachs U.S. Financial Conditions Index (inverted)
3,150
98.5
3,050
99.0
2,950
2,850
99.5
2,750
2,650
100.0
2,550
2,450
100.5
2,350
2,250
101.0
J
A
S
O
N
D
J
F
M
A
M
J
J
2018
2019
Merrill Lynch U.S. Corporate BBB
Option-Adjusted Spread (inverted, %)
S&P 500
3,150
1.25
3,050
1.35
2,950
1.45
2,850
1.55
2,750
1.65
2,650
1.75
2,550
1.85
2,450
1.95
2,350
2.05
2,250
2.15
J
A
S
O
N
D
J
F
M
A
M
J
J
2018
2019
JOHN SOPINSKI/THE GLOBE AND MAIL, SOURCE:
SCOTT BARLOW; BLOOMBERG; Federal Reserve Economic Data
A dividend stock with the wind at its back
Looking for a relatively low-risk stock with good growth potential, a rising dividend and a planet-friendly business model? The answer could be blowing in the wind, John Heinzl writes.
Boralex Inc. is a renewable power producer with most of its operations in Canada and France, and a small but growing presence in the United States. The Montreal-based company generates the vast majority (89 per cent) of its electricity from wind, with smaller contributions from hydro (8 per cent), thermal (2 per cent) and solar (1 per cent).
Boralex’s dividend isn’t huge – the stock currently yields about 3.3 per cent – but its cash payout has been rising steadily and will likely continue to grow as the company expands its generating portfolio. For conservative investors seeking income and growth, Boralex could be a nice addition to a well-diversified portfolio. Here’s why.
Read also: Check out these 15 U.S. stocks for value, momentum and quality
Despite an attractive yield, investors should steer clear of this company’s stock
NFI Group Inc., formerly known as New Flyer Industries Inc., should be in the sweet spot of Canadian industry right now. The company builds energy-efficient buses that run on everything from natural gas to electricity.
Its products are in demand across North America as more municipalities opt for low-emission or emission-free technology to meet mass transit demands.
But somehow, things aren’t going right for this Winnipeg-based company, Gordon Pape writes. The stock (NFI) has been in free-fall for much of the past year, dropping from $52 last September to $30.16 on Monday, a loss of 42 per cent. The dividend remains unchanged at 42.5 cents a quarter ($1.70 a year), providing an attractive yield of 5.5 per cent. But the sharp decline in the share price has many investors worried.
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Karmic reckoning? Investors in activist hedge funds agitate for change
Frustrated by high fees and uninspiring returns, pension funds, sovereign wealth funds and other big institutional investors are demanding U.S. activist hedge funds be more transparent about their investment ideas and charge less, investors and fund managers say. Activist hedge funds push for changes at companies, ranging from ousting management and board directors to buying back stock and divesting non-core assets. Traditionally they have used capital from their total pool of investor money to build stakes in companies, without telling clients in advance what their targets and strategy will be.
They then go “active” and call for changes in some of the companies they invest in, but charge the same fees for all the money that investors place with them.
Now, institutional investors are increasingly pressuring the hedge fund managers to raise separate pots of capital for each company they target through so-called special purpose vehicles, and have been able to drive down how much they pay for investment gains.
What investors need to know for the week ahead
In the week ahead, Canadian markets will be closed on Monday. The U.S. Job Openings and Labor Turnover Survey for June will be released Tuesday. Updates on China’s foreign reserves will be released Tuesday followed by data on the country’s trade surplus on Wednesday. Canada’s new housing price index for June will be released on Thursday and is expected to show a rise of 0.1 per cent from May and flat year-over-year. Canadian employment and building permit figures for July will be released Friday, with no change expected in the overall unemployment rate.
Companies reporting earnings in the week ahead include Marriott International Inc., B2Gold Corp., Duke Energy Corp., Firm Capital Mortgage Investment Corp., Indigo Books & Music Inc., Monster Beverage Corp., Walt Disney Co., American International Group Inc., CVS Health Corp., Manulife Financial Corp., Pizza Pizza Royalty Corp., AltaGas Canada Inc., CI Financial Corp., Canada Goose Holdings Inc., Canadian Tire Corp. Ltd., Cineplex Inc., HudBay Minerals Inc., Magna International Inc., Quebecor Inc., Uber Technologies Inc., Yellow Pages Ltd., CES Energy Solutions Corp. and GMP Capital Inc.
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Goldman Sachs says S&P 500 bull-run has legs but cuts earnings outlook
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